Be Careful with Your USD Trades

Forex market choppiness has made it difficult to establish lasting trading forecasts through recent trading, but overall market trends support further US dollar strength. In recent weeks, clear bullish sentiment extremes across forex futures and options positioning warned of a USD pullback.

Still, the greenback has remained on track and registered fresh highs against the euro and other key currencies. Given clear market choppiness and the distinct risk of a dollar correction, however, it is admittedly difficult for us to call for further US dollar appreciation.

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Euro/US Dollar Options Analysis

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Despite strongly one-sided forex futures and options positioning, the US dollar continues to push higher against the euro. We have recently called for a US dollar correction within the context of a broader recovery, but that has clearly not come to pass as the EUR/USD consistently sets fresh lows. Given record net-short, non-commercial positioning on the EUR/USD pair, however, we cannot responsibly advise that traders bet on further short-term US dollar strength. One-sided sentiment leaves clear risk of a short-term pullback before the dollar can rally further.

NEXT: USD Against GBP, JPY, and More

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British Pound/US Dollar Options Analysis

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Net speculative positioning on the British pound is quite similar to that of the euro, with non-commercial traders very much net short the GBP/USD. Similar one-sided extremes in forex options risk reversals suggest that the GBP/USD may consolidate through the near term in the context of a broader decline. FX options risk reversals likewise show that traders have quite aggressively bet on further British pound weakness. The clear difficulty is placing any GBP/USD short trades. Risk/reward warns that the GBP/USD could bounce noticeably before continuing its decline.

US Dollar/Japanese Yen Options Analysis

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Forex futures traders have aggressively bet on further Japanese yen strength, giving us a fairly bearish overall outlook on the USD/JPY currency pair. Yet more recent price action has pushed forex options risk reversals near their highest in quite some time, and markets are seemingly unwilling to push the USD/JPY lower just yet. The mixed signals between futures and options positioning give us an accordingly unclear trading bias, and we suspect the USD/JPY may consolidate or trade slightly higher through short-term trading.

NEXT: USD Against Loonie, Swiss Franc, and More

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US Dollar/Canadian Dollar Options Analysis

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A shift in Canadian dollar futures and options positioning suggests declines may slow. Last week, we highlighted the sharp shift towards CAD shorts (USD/CAD longs) that pointed to a bullish sentiment extreme. We have subsequently seen price pull back fairly noticeably as markets consolidate and absorb recent USD/CAD rallies. The commensurate turnaround in risk reversals shows that some are betting on further Canadian dollar strength (USD/CAD weakness), while the overall drop in volatility expectations suggests the pair may consolidate before any further sharp moves.

US Dollar/Swiss Franc Options Analysis

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Non-commercial futures positioning on the USD/CHF pair recently flipped to net long the US dollar against the Swiss franc—a considerable shift from previously one-sided USD short extremes. The speed at which markets flipped direction is clear signal that the overall tide has shifted, but as with the euro, one begins to question whether the USD rally has occurred altogether too quickly. The clearly one-sided positioning makes it difficult to bet on further US dollar strength given the considerable risk of a short-term pullback.

NEXT: Analysis Concludes with USD Against Aussie and NZD

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Australian Dollar/US Dollar Options Analysis

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Forex futures and options positioning on the Australian dollar paint a mixed short-term picture for the recently high-flying currency. Non-commercial traders—typically speculative in nature—remain heavily net long the Australian dollar against its US namesake. All the while, FX option traders had recently hit bearish extremes and have since pulled back. The considerable shift in risk reversals suggests that the recent rally may continue through the near term, but clearly one-sided futures positioning paints a bearish picture overall. Look for consolidation through near-term trading.

New Zealand Dollar/US Dollar Options Analysis

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A noteworthy shift in New Zealand dollar futures positioning suggests that the pair’s impressive declines may slow, but we remain long-term bearish the previously high-flying carry trade currency. Futures traders have heavily trimmed their one-sided New Zealand dollar longs through recent declines. All the while, forex options risk reversals dropped to clear bearish extremes and have since bounced. All in all, we see scope for longer-term NZD pullbacks within the context of a broader financial re-pricing of risk. Still, we could see short-term NZD bounces and consolidation given market indecision.